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Cutting Through Complexity

The Parent Traps

23rd November 2015

Partner and head of Mundays’ private wealth team, Julie Man looks at the bank of Mum and Dad and the potential family problems it could cause.

Today, there are few lucky enough to be able to afford their first home and so, for many families, help with a deposit comes from the bank of Mum and Dad. While this is a natural expression of love and care for one’s offspring, it is worthwhile giving some thought to getting the legal details right.

The first thing to ascertain is whether the money given to a child is to be a loan or a gift.

If a loan, then ideally this should be recorded in a formal Loan Agreement with the terms for repayment and any interest clearly specified. The parent also needs to be aware that the value of the loan will be an asset of their estate assessable to Inheritance Tax on death.

If a gift, again this needs a formal Deed of Gift so that the parent’s executors who are responsible for administering the estate are clear as to how to treat the amount gifted and the Inheritance Tax consequences. Namely, where the burden of any Inheritance Tax should lie if the parent dies within 7 years. If this happens and Inheritance Tax is due on the gift, then an uncomfortable situation can arise where the estate can be held liable to pay this which decreases the available estate for any other children. This means one child will have benefited from the gift while the estate suffers the burden of the Tax – a sure way to sour any family get-together! When preparing a Deed of Gift, this problem can be discussed and the parent can decide whether an appropriate provision should be included with the child benefiting from the gift agreeing to be responsible for any Inheritance Tax that may arise from their gift so as to treat all children fairly on death. In addition, further provision will need to be considered in the parent’s existing Wills to ensure that the lifetime gift is taken into consideration and the children are all treated fairly, which is often what the parents would like to happen.

Another popular option is for parents to use their money to put equity into the new home and for the child (and possibly their partner) to sign a Declaration of Trust confirming the percentages of the beneficial interest held on trust for the parent. This can be a useful way of ensuring that money provided stays within the family in the event of the child’s relationship breakdown where one party wants the property to be sold. With an ever-increasing rate of co-habitation in the UK, it is becoming more important for parties to prepare such a Declaration of Trust so everyone with an interest in the property has clarity on what percentage of the value of property is theirs, how notice of intention to sell will be managed and how to come to an agreement on the sale value in the event of a relationship breakdown when relations have soured and the parties may no longer be able to communicate effectively.

When the Declaration of Trust establishes the shares by everyone contributing to the pot, the last step is to make sure there is an appropriate Will in place to make sure your share goes where you want it to on death and whether you want the other parties to have a right of first refusal.

So there you have it: the best way of being nice to your children is to say it with the right legal documents (and not just cash) to avoid future disputes. When making loans, gifts or Declarations of Trusts parents need to get it right to ensure their good intentions are achieved and they do not inadvertently end up causing more family problems.

For further information, please contact Julie Man, Partner and head of Mundays’ private wealth team.

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